Canada's Dollar Falls as Economic Growth Is Less Than Forecast

By Chris Fournier

Aug. 29 (Bloomberg) -- Canada's dollar fell for a second day after a government report showed economic growth in the world's eighth-largest economy was less than forecast.

The Canadian currency has declined 0.7 percent this week as traders increased bets the Bank of Canada will cut borrowing costs. The central bank held its key rate unchanged at 3 percent on July 15. Policy makers reduced interest rates four times from December through April.

Gross domestic product ``came in softer than expected, and that's negative for the Canadian dollar,'' said Matthew Strauss, a senior currency strategist at RBC Capital Markets Inc. in Toronto.

Canada's dollar depreciated 0.4 percent to C$1.0552 per U.S. dollar at 9:29 a.m. in Toronto, from C$1.0510 yesterday. One Canadian dollar buys 94.76 U.S. cents. It has weakened 2.9 percent in August.

Canada's currency will slip to C$1.10 against the U.S. dollar by the end of 2009, according to the median forecast of economists surveyed by Bloomberg News.

Gross domestic product, the sum of all Canadian-produced goods and services, increased at an annualized pace of 0.3 percent from April to June, after a revised 0.8 percent drop in the first quarter, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News had forecast 0.6 percent growth.

Central bank policy makers are scheduled to meet on Sept. 3, when they will leave the key rate unchanged, according to all 16 economists polled by Bloomberg.

Bankers' acceptances futures contracts for December fell 1 basis point, or 0.01 percentage point, to 2.88 percent. They declined from 3.07 percent on Aug. 22. The futures have settled at a three-month lending rate averaging 16 basis points above the central bank's target since Bloomberg started tracking the data.

10-Year Yield

The yield on Canada's 10-year government bond rose 3 basis points to 3.54 percent. The price of the 4.25 percent security maturing in June 2018 fell 25 cents to C$105.79. The yield on the two-year bond fell 3 basis points to 2.71 percent.

The two-year bond's yield will rise to 3.09 percent by the end of this year, while the 10-year bond's yield will increase to 3.86 percent, according to the median forecasts of economists surveyed by Bloomberg News.

The yield advantage of the 10-year U.S. Treasury note compared with similar-maturity Canadian government bonds was 26 basis points, down from 36 basis points on Aug. 11. The Canadian 10-year bond yielded 36 basis points more than its U.S. counterpart on Jan. 22.

Canadian government bonds have returned 4.9 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries have returned 4 percent this year.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net